Stocks slid yesterday led by energy, basic material and financial shares as the Dow erased just about all of Monday’s gain and the S&P 500 was pushed back to a level that is just above the July 15 multi-year low – the index endured its steepest drop since Feb 2007.
Financials led the declines, falling 6.6% yesterday, as a 45% drop in Lehman Brothers shares led the index that tracks these stocks lower.
Energy shares fell 6.4% as the decline in oil continues to punish these shares. I guess many have forgotten that these firms will continue to post strong profit results – oil trades at $103 per barrel for goodness sakes. These stocks trade between 5-8 times earnings and are posting high double-digit profit growth.
In fact, there are a number of stocks and entire sectors that trade at attractive valuations, it’s just investors must have a great deal of patience and resolve during times such as these.
Market Activity for September 9, 2008
Oil touched $102 per barrel yesterday, before closing at $103.26 – down 2.90% -- as concern over a global economic slowdown has increased in recent days.
OPEC’s spokesman -- contradicting yesterday’s comments from the Saudi Oil Minister who stated inventories are “healthy” and the market is “well balanced” – is saying this morning that there is a “huge oversupply” and they’ll cut production by 500,000 barrels per day. They have obviously succumbed to pressure from Iran and Venezuela – two of whom are at the least proxies for a Russian voice within the cartel. In reality, Russia should have been granted membership this indecorous group long ago as they run things much like a mafia anyway..
And one more point on crude and the market, I doubt anyone would have thought stocks (as measured by the S&P 500) would be down 3.3% (and barely above the multi-year low set on July 15) as the price of oil has plunged 31% since July 3 and the dollar has rallied big time -- even if the current price of crude remains elevated. But while it looks like all hell has broken loose we have to acknowledge to some extent that heretofore commodity-heavy hedge funds are causing some adjustments.
Hedge funds were riding the commodity gravy train, and who could have blamed them; the Fed’s easy money policy was signaling to those with a traders’ mentality to do just that. But now that the CRB is off by 24% and oil down heavily from the peak, the unwinding of those trades are causing havoc.
Look, we are not out of the woods yet, and maybe quite a way from it; there are a plethora of uncertainties out there – as we talk about nearly each day – and a number of them are capable of creating troubles at any time. But we could also find, a few weeks out, that stocks begin to climb as investors turn their attention to attractive long-term valuations and away from focusing on the anticipation of a potential train wreck.
On the economic front, the Commerce Department reported wholesale inventories rose 1.4% in July and as expected sales declined; they slipped 0.3% in July.
This decline in sales is very normal as activity was robust over the previous four months – up 26% at an annualized rate.
Further, sales were largely hurt by petroleum sales. Excluding petro, merchant wholesaler sales climbed 0.8% in July and are up 12.8% over the past six months at an annual rate – 12% three-months annualized.
We’ll note that machinery sales were also weak, falling 3.7% in July. However, this segment had been on fire, up 22% annualized over the previous three months, and these big-ticket items are volatile. One has to expect a decline in machinery sales after this activity. I suspect they’ll bounce back as the energy industry continues to hum and incentives to increase business equipment remain in effect through year end.
With regard to the impact on GDP, the rise in wholesale inventories – twice as much as expected – offers good evidence business-retail inventories will be stronger-than-estimated (we get that number next week) and we may see this result in another upward revision to the Q2 GDP report.
The inventory-to-sales ratio did move up but remains at an extremely low level historically, as the chart below illustrates.
Important point, automotive inventories alone rose 2.3% in July, but last week’s auto sales data showed inventories were trimmed substantially due to incentives that helped August sales activity. I’d look for wholesale and overall business inventories to move back to a record low when the August number is released, which provides a strong indication the production needed to rebuild stockpiles will keep overall economic growth positive.
In a separate report, the National Association of Realtors stated pending home sales for July fell 3.2%, breaking a very nice trend that had this figure up 32% at an annual rate over the previous three months. Pending sales in the West plunged 10.6% and 7.5% in the Northeast. The South region was unchanged from the prior month and the Midwest posted an increase of 2.8%
Mortgage spreads, until the past couple of days, remained historically wide and this hasn’t helped the housing market. After the Treasury Department’s decision to take the mortgage GSEs into conservatorship that has changed as spreads have narrowed and mortgage rates will fall substantially next week. Still, this won’t solve things as those that put little-to-no money down, or do not have a meaningful down payment will find little help outside of the FHA program.
The big issue with housing is a speculative bubble has been burst in many regions and the decline in prices will simply run its course until the overhang of home supply is absorbed. Once buyers get a sense that prices have bottomed, sales will begin to ramp up in a consistent manner. It will just take time, there is nothing the government or anyone else can do about it.
What can be done for the economy as a whole is for Congress and the next administration to reduce tax rates on incomes and business, make permanent increased current-year write-down allowances and bonus depreciation schedules, and keep the rates on capital and dividend returns unchanged at the least. This will do three things:
One, it will restore investor confidence and thus drive equity prices higher.
Two, it will keep the boost we’ve seen in capital spending over the past few months alive, which will boost GDP and drive future productivity gains via the new equipment.
Three, it will lead to job creation as small business is this economy’s largest job creator – remember than two-thirds of those in the top federal tax bracket is small business. All three of these factors will have a beneficial effect on housing, over time.
It will also help if the Fed learns from this harsh lesson not to recklessly push interest rate to levels that encourage the behavior that led to the housing excesses we are now watching correct. Keeping fed funds at 2.0% or below for the three years that ran November 2001 – November 2004 was a grave mistake. Hindsight is 20/20, but we were calling for the Fed to raise rates at the end of 2004, as longer-term readers may recall, as it was evident the economy was running on most cylinders by the end of 2003.
We’re without an economic release today, but will get back to it tomorrow with the July trade balance, August import prices and initial jobless claims.
Have a great day!
Brent Vondera, Senior Analyst
Financials led the declines, falling 6.6% yesterday, as a 45% drop in Lehman Brothers shares led the index that tracks these stocks lower.
Energy shares fell 6.4% as the decline in oil continues to punish these shares. I guess many have forgotten that these firms will continue to post strong profit results – oil trades at $103 per barrel for goodness sakes. These stocks trade between 5-8 times earnings and are posting high double-digit profit growth.
In fact, there are a number of stocks and entire sectors that trade at attractive valuations, it’s just investors must have a great deal of patience and resolve during times such as these.
Market Activity for September 9, 2008
Oil touched $102 per barrel yesterday, before closing at $103.26 – down 2.90% -- as concern over a global economic slowdown has increased in recent days.
OPEC’s spokesman -- contradicting yesterday’s comments from the Saudi Oil Minister who stated inventories are “healthy” and the market is “well balanced” – is saying this morning that there is a “huge oversupply” and they’ll cut production by 500,000 barrels per day. They have obviously succumbed to pressure from Iran and Venezuela – two of whom are at the least proxies for a Russian voice within the cartel. In reality, Russia should have been granted membership this indecorous group long ago as they run things much like a mafia anyway..
And one more point on crude and the market, I doubt anyone would have thought stocks (as measured by the S&P 500) would be down 3.3% (and barely above the multi-year low set on July 15) as the price of oil has plunged 31% since July 3 and the dollar has rallied big time -- even if the current price of crude remains elevated. But while it looks like all hell has broken loose we have to acknowledge to some extent that heretofore commodity-heavy hedge funds are causing some adjustments.
Hedge funds were riding the commodity gravy train, and who could have blamed them; the Fed’s easy money policy was signaling to those with a traders’ mentality to do just that. But now that the CRB is off by 24% and oil down heavily from the peak, the unwinding of those trades are causing havoc.
Look, we are not out of the woods yet, and maybe quite a way from it; there are a plethora of uncertainties out there – as we talk about nearly each day – and a number of them are capable of creating troubles at any time. But we could also find, a few weeks out, that stocks begin to climb as investors turn their attention to attractive long-term valuations and away from focusing on the anticipation of a potential train wreck.
On the economic front, the Commerce Department reported wholesale inventories rose 1.4% in July and as expected sales declined; they slipped 0.3% in July.
This decline in sales is very normal as activity was robust over the previous four months – up 26% at an annualized rate.
Further, sales were largely hurt by petroleum sales. Excluding petro, merchant wholesaler sales climbed 0.8% in July and are up 12.8% over the past six months at an annual rate – 12% three-months annualized.
We’ll note that machinery sales were also weak, falling 3.7% in July. However, this segment had been on fire, up 22% annualized over the previous three months, and these big-ticket items are volatile. One has to expect a decline in machinery sales after this activity. I suspect they’ll bounce back as the energy industry continues to hum and incentives to increase business equipment remain in effect through year end.
With regard to the impact on GDP, the rise in wholesale inventories – twice as much as expected – offers good evidence business-retail inventories will be stronger-than-estimated (we get that number next week) and we may see this result in another upward revision to the Q2 GDP report.
The inventory-to-sales ratio did move up but remains at an extremely low level historically, as the chart below illustrates.
Important point, automotive inventories alone rose 2.3% in July, but last week’s auto sales data showed inventories were trimmed substantially due to incentives that helped August sales activity. I’d look for wholesale and overall business inventories to move back to a record low when the August number is released, which provides a strong indication the production needed to rebuild stockpiles will keep overall economic growth positive.
In a separate report, the National Association of Realtors stated pending home sales for July fell 3.2%, breaking a very nice trend that had this figure up 32% at an annual rate over the previous three months. Pending sales in the West plunged 10.6% and 7.5% in the Northeast. The South region was unchanged from the prior month and the Midwest posted an increase of 2.8%
Mortgage spreads, until the past couple of days, remained historically wide and this hasn’t helped the housing market. After the Treasury Department’s decision to take the mortgage GSEs into conservatorship that has changed as spreads have narrowed and mortgage rates will fall substantially next week. Still, this won’t solve things as those that put little-to-no money down, or do not have a meaningful down payment will find little help outside of the FHA program.
The big issue with housing is a speculative bubble has been burst in many regions and the decline in prices will simply run its course until the overhang of home supply is absorbed. Once buyers get a sense that prices have bottomed, sales will begin to ramp up in a consistent manner. It will just take time, there is nothing the government or anyone else can do about it.
What can be done for the economy as a whole is for Congress and the next administration to reduce tax rates on incomes and business, make permanent increased current-year write-down allowances and bonus depreciation schedules, and keep the rates on capital and dividend returns unchanged at the least. This will do three things:
One, it will restore investor confidence and thus drive equity prices higher.
Two, it will keep the boost we’ve seen in capital spending over the past few months alive, which will boost GDP and drive future productivity gains via the new equipment.
Three, it will lead to job creation as small business is this economy’s largest job creator – remember than two-thirds of those in the top federal tax bracket is small business. All three of these factors will have a beneficial effect on housing, over time.
It will also help if the Fed learns from this harsh lesson not to recklessly push interest rate to levels that encourage the behavior that led to the housing excesses we are now watching correct. Keeping fed funds at 2.0% or below for the three years that ran November 2001 – November 2004 was a grave mistake. Hindsight is 20/20, but we were calling for the Fed to raise rates at the end of 2004, as longer-term readers may recall, as it was evident the economy was running on most cylinders by the end of 2003.
We’re without an economic release today, but will get back to it tomorrow with the July trade balance, August import prices and initial jobless claims.
Have a great day!
Brent Vondera, Senior Analyst
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